Please ensure Javascript is enabled for purposes of website accessibility

Why Cloudflare Stock Is Still a Smart Buy

By Trevor Jennewine – Nov 1, 2021 at 10:59AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

This cloud computing company is growing rapidly.

Cloudflare (NET -0.51%) is a cloud services provider. Its global network is designed to boost the speed, reliability, and security of corporate resources. Since going public in September 2019, the stock has skyrocketed over 920%, and its prospects remain bright.

In this Backstage Pass video, which was recorded on Oct. 15, 2021, Motley Fool contributor Trevor Jennewine discusses why Cloudflare is still a smart long-term investment, highlighting its massive market opportunity and stellar financial performance.

10 stocks we like better than Cloudflare, Inc.
When our award-winning analyst team has a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor, has tripled the market.*

They just revealed what they believe are the ten best stocks for investors to buy right now... and Cloudflare, Inc. wasn't one of them! That's right -- they think these 10 stocks are even better buys.

See the 10 stocks

 

*Stock Advisor returns as of October 20, 2021

 

Trevor Jennewine: In 2020, the company put its market opportunity at $72 billion. I mentioned that that figure is going to hit $100 billion by 2024. During the most recent quarter, 53% revenue growth year over year, a 77% gross margin, and 1,088 large customers.

Looking at revenue growth over the long term, this shows that, between 2016 and 2020, 50% compound annual growth rate. Very impressive. That number actually ticked up to 53% in the most recent quarter -- so accelerating growth on top of what was already a fast rate of growth.

Then this breaks down the two different types of paying customers. The bar graph on the left shows paying customers collectively; that figure has been growing at about 26% per year over the last few years. That actually ticked up to 32% in the last quarter, so accelerating customer growth. Then large customers are growing about 67% per year over this period. They're really gaining traction with those large enterprises.

One thing that stands out to me about this is that one of Cloudflare's competitors is Fastly. And Fastly hangs its hat on the fact that it has a more programmable, more flexible platform. It can cater to the needs of very large enterprises that have these very specific use cases that they want to build at the edge. Fastly, they always say that their platform is targeted toward those large enterprise customers, but Cloudflare is having much more success. It has far more of these large customers, and it's growing its customer base much more quickly. I think that's interesting, because Fastly specifically mentioned Cloudflare and cites some differences between itself and the company in its own slide deck. But Cloudflare appears to be executing much better than Fastly. It pains me to say that because I'm a Fastly shareholder, but that is the truth.[laughs]

One of the last things that is noteworthy with this company is the net retention rate. That figure is 124% in the most recent quarter. What that means is that, if the average customer spent $1 a year ago, they spent an extra $0.24 during the most recent year. It just shows that their customers are spending more over time. And that hits on its land-and-expand growth strategy. It's not only growing its customer base, it's also upselling existing customers.

Then one other metric on the right-hand side here. Gross retention is about 90%. Gross retention doesn't factor in any of those upsells. The only thing that it's looking at is whether or not a client is leaving or reducing spend on the platform. Gross retention at 90% means that the company is keeping the vast majority of its customers every year. Over 90% of its customers are staying with the company.

Trevor Jennewine owns shares of Fastly. The Motley Fool owns shares of and recommends Cloudflare, Inc. and Fastly. The Motley Fool has a disclosure policy.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.